Mind the Gap
A Financial Times article highlighted in Tuesday’s NACD Directors Daily indicated a gap between CEO pay and performance. The article stated that for many FTSE 100 companies, “pay and performance bear little relationship to each other.”
In response to the companies that inadequately align pay and performance, NACD brought together a Blue Ribbon Commission of directors, compensation experts and leaders in the governance community. In the 2010 Report of the NACD Blue Ribbon Commission Report on Performance Metrics, the Commission stressed that a better understanding of a company’s metrics will improve a board’s ability to award fair compensation. The report identifies three critical areas boards should consider: the selection of financial and nonfinancial metrics, the relation of metrics to compensation, and effective communication with shareholders.
The Commission recommends six imperatives to guide boards as they consider the performance metrics used by their company:
- Understand and agree on the company’s key performance metrics. These key metrics, set for both the enterprise as a whole and for major business units, should be used to track progress against the company’s strategy.
- Establish company performance metrics to cascade throughout the entire enterprise. The board should ensure that management has used the metrics to establish more robust and detailed metrics at lower levels.
- Track company performance against metrics on an ongoing basis. Metrics need to be set annually and monitored over time.
- Establish consistent and appropriate executive performance metrics. These measures should be used not only for compensation of top officers, but also for managers throughout the organization.
- Reward executives based upon performance as measured by appropriate metrics. Determine compensation payments based upon an assessment of performance, including consideration of risk, for top officers and other levels of management.
- Communicate with shareholders regarding how the company has paid for performance. Use clear language to convey the reasons and results of pay.